Cyprus-Forum.com

[Piratis]

ECONOMIC prospects for Cyprus over the next 12 months are cautiously positive, according to the EU Commission’s Spring Forecast, but the projections are subject to the uncertainty of the effects of a Cyprus solution, which would cause fundamental changes.

The report issued yesterday said GDP growth for 2004 was projected to climb to 3.4 per cent, strengthening further to 4.1 per cent in 2005.

Tourist arrivals are forecast to revive gradually, reflecting a global recovery in the industry together with a positive spillover from the Olympic Games in Athens this summer.

Investment growth is also on the road to recovery, encouraged by EU accession, liberalisation in the financial and utilities markets and infrastructual projects, such as the new airports. Consumption growth is also set to bounce back in line with real wage development. Overall, the forecast predicts a decrease in the current account deficit in 2004 and 2005 to around 3.6 per cent of GDP.

In 2003, the current account deficit reached 4.4 per cent, below the 2002 level but still relatively high, the report said, and therefore remaining “a potential concern”.

The fiscal deficit also “went awry”, in 2003, according to the report. “Increased spending through higher defence outlays and expansionary measures to offset subdued external demands plus revenue shortfalls linked to low growth and tax avoidance led to a government deficit of 6.3 per cent, even higher than the Autumn forecast of 5.2 per cent,” it said.

Although the government’s new fiscal consolidation plan no longer targets a budget balance over the medium term, considerable corrective measures are still required, it added.

However, the quality of public finances should improve due to public finance reform to be finished at the end of 2004. The forecast is for a gradually declining but still relatively high deficit of 4.6 per cent of GDP for 2004 and 4.1 per cent of GDP by 2005, somewhat above the government’s targets.

As GDP growth picks up, unemployment, which stood at 4.4 per cent last year, is expected to inch lower by 2005 due to the flexibility of a labour market linked to a service economy.

The peg to the euro with a closely managed monetary policy and relatively low wage pressures have been keeping inflation in check. Prices in 2003 were mainly pushed by hikes in VAT related to EU accession. For 2004/2005, inflation is expected to drop back to two per cent from four per cent last year.

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